Kentucky’s second highest budget surplus in history at more than $1 billion puts the state on “solid terms” to begin cutting the state income tax in January, says Kentucky House Speaker David Osborne.
Osborne, R-Oldham County, said the surplus recorded at the end of the state’s fiscal year on June 30 should allow Kentuckians to “keep more of their hard-earned money as they see the first drop in the incremental elimination of the personal income tax.”
The surplus of $1.0135 billion is just shy of last year’s record $1.1 billion.
The state plans to cut the individual income tax from 5 percent to 4.5 percent in January 2023 and to 4 percent in January 2024. Legislation approved by the General Assembly this year provides the possible phasing out of the tax over years using future income growth.
Before the rate can be lowered, the state must meet preset triggers from a formula based on how much actual revenues exceed expenses plus.
The legislation specified that a reduction of 0.5 points in personal income tax will be triggered under two conditions.
First, the balance of the state’s Rainy Day Fund or surplus must be at least 10 percent of the General Fund revenue at the end of a fiscal year.
Next, the General Fund revenues at the end of a fiscal year must exceed General Fund appropriations by at least the amount that would be required to reduce the personal income tax by one percentage point.
An 0.5 percent cut in the tax rate would save Kentucky taxpayers an estimated $600 million.
The state Department of Revenue, with the state budget director’s office, is to review the reduction conditions and report the findings to the legislature by Sept. 5. Initially, the reduction conditions for fiscal years 2021 and 2022 will be considered. After that, each annual review will consider only the most recently completed fiscal year. A state fiscal year begins on July 1 and ends June 30.
Democratic Gov. Andy Beshear and the Republican-led legislature have different views on why the surplus.
The surplus is “great news but comes as no surprise to those of us in the legislature,” said Osborne. “This is what happens when you commit to sound fiscal policies and responsible tax reforms in order to foster economic growth as we have over the past five years.”
The chair of the House budget committee, Rep. Jason Petrie, R-Elkton, said lawmakers anticipated the budget surplus. He said lawmakers in 2018 took the first steps towards comprehensive tax reform with a focus on updating business taxes to better reflect the modern economy, broadening the base to more fairly levy taxes and lowering tax rates for individuals.
Petrie added that the legislature also made major contributions to the state’s budget reserve trust fund, which he said can be used to help with challenges like tragic flooding in Eastern Kentucky and opportunities like economic development investments.
Beshear has said there’s “enough credit to go around” for the record-breaking budget surpluses since he took office in 2019. He said strong economic development gains under his tenure are helping the economy.
The legislature overrode Beshear’s veto of the tax bill this year. He said he vetoed it because it also raised the taxes on 35 different services and industries, including hybrid and electric vehicles at a time when Kentucky is trying to become a world leader in manufacturing those vehicles and their batteries.
Jack Brammer is a part-time state reporter covering the Northern Kentucky Tribune state legislative caucus and state politics. Prior to joining the NKyTribune, he was the Frankfort Bureau Chief for the Lexington Herald-Leader, a role he retired from in December 2021 after covering nine Kentucky governors and 58 sessions of the Kentucky General Assembly.
